Supply boom could stifle UAE’s performance recovery
Supply boom could stifle UAE’s performance recovery
09 APRIL 2018 8:37 AM

The United Arab Emirates’ hotel supply has increased 24.9% in four years and ADR and RevPAR growth have decreased consistently since 2014.

DUBAI, United Arab Emirates, and HENDERSONVILLE, Tennessee—The United Arab Emirates finished 2017 with 767 hotels with 147,594 rooms, according to pipeline data from STR, parent company of Hotel News Now, and continued supply growth could keep the country’s key hotel performance metrics from improving.

In 2017, hotel operators reported continuing performance weakness with revenue per available room declining 3.3%. This was the fourth consecutive year with RevPAR deterioration driven down by continued average-daily-rate declines. In local currency, absolute ADR declined sharply in 2017 to 599.58 Emirati dirhams ($163.26), which is down from 2013, when ADR was 752.90 Emirati dirhams ($205.01). This equates to a 20% price drop over that four-year period.

Since 2013, absolute occupancy never dropped below 74.7% in the United Arab Emirates, which is a remarkable feat given that supply increased by 24.9% to 53 million roomnights available in 2017. Room demand increased at a very healthy clip from 32 million roomnights sold in 2013 to nearly 40 million roomnights sold in 2017, a 24.4% increase. The chart below shows the sharp rebound in rooms sold after the global financial crisis in 2008 and the steady strong increase—albeit at a slower pace—of rooms being added to the inventory.

The imbalance between supply and demand growth has only recently flipped in favor of demand growth, which caused occupancy increases, although those were very, very small. The chart below shows the interplay between occupancy and ADR change. 

It will be interesting to observe if the most recent slightly positive occupancy results will lead to a recovery in hotel prices in the United Arab Emirates or at least to fewer discounts.

The occupancy by day of week shows that the slight occupancy gains were focused on the nights when business travelers were most active: Monday and Tuesday. The country’s traditional weekend nights—Thursday and Friday—have registered very high occupancies overall and limited declines of late, which points to healthy demand increases to counter supply growth.

At the same time that daily occupancies seem to recover and demand shows signs of healthy growth, ADR change shows a very different picture. The following chart illustrates that ADR has declined in local currency for the last two years on each day of the week. 

Given how the impact of new supply has influenced occupancy and rate growth—or lack thereof—the development pipeline is of particular importance to the United Arab Emirates. Through December 2017, STR counted 147,594 existing rooms and 38,811 rooms under construction. If all those rooms opened in 2018, the country’s supply growth would be 26.2%; even if those rooms open in the next 24 months, the average annual supply growth would still exceed 13%. Of course, this increase in room supply without a commensurate increase in demand would have a significant negative impact on occupancy and probably ADR growth.

Below are the rooms in varies stages of the United Arab Emirates’ active pipeline:

So currently there is a potential for a 45% increase in rooms in the UAE, but the final number will likely be lower as projects in the earlier phases might encounter financing roadblocks given the muted performance of late.

In summary, the very strong influx of new rooms into the UAE has put a governor on pricing power and has led to recent RevPAR declines. It will be important to see if the most recent increases in room demand can give hoteliers confidence in their pricing power or if the rooms under construction will spell continued RevPAR softness in the market.

This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.

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